VZCZCXRO7141
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0344/01 0750614
ZNR UUUUU ZZH
R 160614Z MAR 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5890
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEHC/USDOL WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
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RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 000344 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD ELAB EINV WTRO CH
SUBJECT: U.S. Companies in South China are Profitable; Labor and 
Regulatory Challenges Remain 
 
REFERENCE: A) Guangzhou 301; B) 06 Guangzhou 32385; C) 06 Guangzhou 
 
31579; D) 06 Guangzhou 10089 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) SUMMARY AND COMMENT: According to an AmCham-South China 
survey released on March 15, most U.S. investors in South China are 
profitable and planning further investments in 2007.  Companies 
prefer Guangdong's Pearl River Delta (PRD) because of its large and 
relatively prosperous domestic market and its developed logistics 
network.  The survey highlighted the gradual shift in the focus of 
U.S. companies in the past few years from manufacturing for export 
to manufacturing for the domestic market.  Additionally, the number 
of companies providing services has increased to just over 50 
percent.  However, despite the rosy outlook, investors remain 
frustrated with regulators' lack of transparency, a dearth of 
skilled workers, and rising labor costs.  A surprising 75 percent of 
survey participants have not made any preparations for an avian flu 
outbreak.  Though business contacts often complain to Post of the 
difficulties of operating in South China's opaque and sometimes 
arbitrary business environment, this survey indicates that, on the 
whole, U.S. companies are doing well here, the domestic market is 
growing, and the market for services is increasing.  END SUMMARY AND 
COMMENT. 
 
About the Survey 
---------------- 
 
¶2. (U) The 2007 State of Business in South China Survey, conducted 
by AmCham-South China and Hewitt Associates, surveyed 364 companies 
from January 14, 2007 to February 6, 2007.  Half of the respondents 
are subsidiaries of U.S. companies and a majority has more than 10 
years of experience in China.  Three quarters are headquartered in 
either Guangzhou or Shenzhen.  The respondents are split 50-50 
between those that manufacture goods and those that provide 
services. 
 
Profitability and Rising Investment 
----------------------------------- 
 
¶3. (U) According to the survey, most U.S. companies in South China 
are profitable and are meeting or exceeding budget expectations. 
Only those that established operations in China within the last two 
years are not profitable - though they almost all expect to see 
improvement within the next two years.  The vast majority of 
companies expect to increase their China business activities and 
expand existing facilities during the next few years. 
 
¶4. (U) Surveyed companies are also planning to increase their 
investment levels throughout the country.  In most cases the 
increase will be in the range of a few million dollars - a 
significant amount considering that most of the companies invested 
less than USD 10 million in China in 2006.  A 2006 AmCham-South 
China survey found similar results in profitability and investment 
trends (ref C). 
 
A Positive Business Climate 
--------------------------- 
 
¶5. (U) The vast majority of companies are satisfied with the 
business climate in South China, and most believe it has improved 
over the last 12 months.  Almost all of the companies believe the 
government's economic reforms in 2006 were positive overall.  As for 
why these companies chose Guangzhou or other South China cities as a 
base of operations, most cite the large and relatively prosperous 
customer base, proximity to Hong Kong, logistical and transportation 
advantages, and greater transparency. 
 
Shifting to the Domestic Market and Services 
-------------------------------------------- 
 
¶6. (U) Interestingly, the survey highlighted the gradual shift in 
the focus of U.S. companies during the past few years from a heavy 
emphasis on manufacturing for export to now manufacturing for the 
domestic market.  This demonstrates the growing maturity and 
openness of the domestic market.  Additionally, the number of 
companies providing services has increased to just over 50 percent, 
also reflecting greater market openness largely due to China's WTO 
accession. 
 
Top Complaints: Regulatory Issues and Human Resources 
--------------------------------------------- -------- 
 
 
GUANGZHOU 00000344  002 OF 002 
 
 
¶7. (U) Despite the generally positive impressions of China's reforms 
in 2006, companies still see regulatory issues as their biggest 
challenge in China.  Though the survey does not cite specifics, 
business contacts have complained of a lack of transparency in local 
regulators' implementation of new laws.  Human resource issues 
continue to be a serious concern for companies here as well, 
particularly the lack of qualified managerial and specialist talent, 
rising labor costs, and, to a lesser extent, a lack of unskilled 
labor (see reftel A).  Companies see these challenges as unlikely to 
change over the next few years. 
 
Avian Flu: Ignoring the Issue 
----------------------------- 
 
¶8. (SBU) Companies are no doubt aware of the risks of an avian flu 
outbreak in South China, both because of the intense media interest 
in 2006 and active outreach programs by AmCham and Post.  However, 
three-quarters of companies still have not set up contingency plans, 
education campaigns, or vaccination programs for employees. 
Apparently, though companies are hearing the message, they are not 
taking it to heart. 
 
ROCK